Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Foreign Affairs, Defence and Trade Legislation Committee - 22/10/2014 - Estimates - DEFENCE PORTFOLIO - Defence Materiel Organisation

Defence Materiel Organisation

[16:49]

Senator CONROY: I have some questions from the earlier sections that I will put on notice. Air Chief Marshal Binskin, you came in late this morning. Why were you held up? I think you said you had another meeting.

Air Chief Marshal Binskin : It was government business. We were attending a National Security Committee meeting.

Senator CONROY: Mr Richardson?

Mr Richardson : The same.

Senator CONROY: Minister?

Senator Johnston: I was here.

Senator CONROY: You did not go to the National Security Committee meeting?

Senator Johnston: I did not go to the meeting because—

Senator CONROY: You could not find someone else to fill in for you?

Senator Johnston: No. I take the committee's work here as a priority.

Senator CONROY: Didn't we have troops engaged—I would have thought the priority was the NSC.

Senator Johnston: I was not going to add too much to what the CDF was going to inform NSC about.

Senator CONROY: I would have hoped that you could have added something. If the secretary of your department and the CDF were there I would have hoped you could have value added to the NSC. But I do appreciate you commitment to this. I am just surprised.

Senator IAN MACDONALD: It is an unusual criticism to make: 'Thank you for coming to the committee'!

Senator CONROY: Minister, I just want to go back to that famous Adelaide sunny afternoon of 8 May 2013. I just want to confirm that you made the following statement:

We will deliver those submarines from right here at ASC in South Australia.

…   …   …

The Coalition today is committed to building 12 new submarines here in Adelaide, …

That was your statement. You are not suggesting it was not your statement?

Senator Johnston: No, I am not suggesting that. But I am saying that that statement is completely out of context with the rest of the interview material, which I am sure you are aware of.

Senator CONROY: I appreciate you are attempting to put it into—

Senator Johnston: I am attempting to establish on the record the truth of the matter, and I will not be verballed by you in circumstances where you refuse to put on the record matters that are very important. I said in that interview that we will pursue options three and four, unless they turn out to be fantasy. Senator, you and I both know that those two options are fantasy.

Senator CONROY: That is certainly what you seek to assert, but—

Senator Johnston: It is there in black and white if you want to read the thing properly.

Senator CONROY: It is there in black and white that today you are committing to building 12 new submarines here in Adelaide. I will move on—

Senator Johnston: Unless the options that the government was setting out as being the basis for their promise were fantasy. Can I tell you again, for about the twelfth time, what the government of the day was promising was fantasy.

Senator CONROY: I appreciate you wanting to try to cover yourself. I will move on—

Senator Johnston: I am not covering myself, I am telling you the fact. Just the truth. Nothing but.

Senator CONROY: I will now turn to nuclear submarines. The Australian Financial Review reported on 12 August this year that the Prime Minister ordered an assessment of the suitability of nuclear submarines to replace Australia's submarine fleet. Can I confirm that that is accurate. This is not about giving advice to government. This is government giving you advice. Have you been given that instruction by the Prime Minister's office or the Prime Minister?

Senator Johnston: Can I take that on notice?

Senator CONROY: Mr King, you must know whether or not the Prime Minister has ordered you to investigate nuclear submarines. It is a pretty big shift in government policy or government thought.

Mr Richardson : If I can add, very early on at different points there have been discussions about nuclear powered submarines. It has been in a very broad context. At no point has it been on the table as an option.

Senator CONROY: So the Prime Minister has not ordered—

Mr Richardson : It is the sort of exchange that anyone in this room would have if they were talking about submarines.

Senator CONROY: I would not be, but maybe I am not the only one in this room.

Mr Richardson : Curiosity.

Senator CONROY: So the Prime Minister was just curious?

Mr Richardson : I am not saying the Prime Minister, I am saying that within government, in the context of broad generalised discussions about submarines, inevitably you get—

Senator CONROY: It is a very specific question I am asking. Has the Prime Minister, as reported, ordered an assessment of the suitability of nuclear submarines?

Mr Richardson : I am not aware of that. I am not aware of the Prime Minister, at the time that—what was the date?

Senator CONROY: 12 August. It is not that long ago.

Mr Richardson : I am not aware of the Prime Minister having ordered an assessment—

Senator CONROY: Did he suggest, out of curiosity, that it should be investigated?

Mr Richardson : I am not aware.

Senator CONROY: Minister, can you rule out, once and for all, a nuclear submarine option? I did not know you had changed your policy, that is all.

Senator Johnston: You know my attitude to that very convenient global expression 'rule in, rule out'. But I can tell you now that the government's policy, very firmly, is for a diesel-electric submarine.

Senator CONROY: So there has been no change in the government policy on this?

Senator Johnston: Not that I am aware of.

Senator CONROY: On the issue of capability, what work has been done to identify Australia's top-level requirements and specification for our future submarines? I know Senator Xenophon has just been asking something along those lines. Can you give me a sense of what the top-level requirements are on the requirements and specifications?

Rear Adm. Sammut : There have been several levels of work on the requirements for the future submarine, starting with strategic guidance, which is high-level guidance which outlines the general roles and general capabilities the submarine is meant to be able to do. That has been trickled down then into a top-level requirement, which is a slightly more detailed statement of the requirements of the future submarine, and they then flow down into much more detailed descriptions, including what is called an operational concept document and a function and performance specification.

Senator CONROY: Is any of that material unclassified and on the public record?

Rear Adm. Sammut : No, it is not. As you might imagine, that details the capabilities of the future submarine that will be in service one day with the Australian fleet and, therefore, that is quite classified information.

Senator CONROY: Has there been any change to these top-level requirements since the election of last year?

Rear Adm. Sammut : There has been a continual refinement of—

Mr King : Senator, I think I will just answer that.

Senator CONROY: I thought Rear Admiral Sammut was doing fine.

Mr King : You are looking for a change in direction. There is no change in direction. I just wanted to intervene because we refine these documents all the time. There will have been changes since the last election, but no change in direction.

Senator CONROY: 'No change in direction,' did you say, Mr King?

Mr King : No shift in direction.

Rear Adm. Sammut : If I could just be clear, what I was trying to say was that the refinement is an ongoing process for all of the capability development documents that we come up with. Even through the Kinnaird process, there is a continual refinement of those. At the highest level, though, the guidance remains sound, as does the top-level requirement. We have continued to refine our operational concept document and function and performance specification, which will remain an ongoing process throughout the capability development cycle.

Senator CONROY: The word 'refinement' can cover an extraordinary range of changes. I could refine a four-legged table by adding a fifth leg or chopping one off and having three legs, and you could still pretend that I was just refining the shape of the table. Its functionality is surely affected by any or both of those refinements.

Mr King : I just want to make it clear that I did not want to get caught on a technicality. I thought we had made one minor change, but maybe we have made no change to the TLR. My point, if I can make it in plain English, is that there is no substantial shift or change in the requirements since the change of government. We continue to work on all these documents, and I am not trying to be subtle about those words or use them creatively.

Senator CONROY: I will come back to a further discussion on that, I am sure. Senator Xenophon and others will want to follow up. So we start with strategic guidelines that I think you mentioned trickle down to top-level. That is TLR, and Mr King has used that acronym. Does TLR refer to top-level?

Rear Adm. Sammut : That is correct.

Senator CONROY: Top level report?

Rear Adm. Sammut : Top level requirements.

Senator CONROY: What comes after that?

Rear Adm. Sammut : An operational concept document.

Senator CONROY: And then?

Rear Adm. Sammut : A function and performance specification.

Lt Gen. Caligari : It is a fairly well-documented and formal process that takes us from what essentially begin as needs. The three services, and the three service chiefs who are responsible for the way they fight, generate needs. Those needs statements are then gathered together and understood at a joint level to ensure that joint needs are accommodated. Then there are integration needs as well. The three of those then form the top level requirement. It is not uncommon for things to change along the way, particularly as other parts of the capability change. It is not simply a matter of saying, 'I have one particular piece of equipment I want', writing a top level requirement and then, at some stage further down the track, acquiring it. There is a continual balancing of the force and a balancing of the needs to generate the requirements. As the process moves forward, those requirements will be refined as well. The function and performance specification, the operational concept document and a test concept document are the three documents generated by the requirements process, as agreed by government. They are then used as the traceability to the strategy to acquire the capability.

Senator CONROY: Thank you. Have the government directed any changes or refinements to these requirements?

Rear Adm. Sammut : No.

Senator CONROY: What about 'suggested' or any of the variants on 'suggested': 'directed', 'requested'—nothing in that category?

Rear Adm. Sammut : No.

Senator CONROY: Nuclear submarines, then—that would be a small refinement. Could you fit a nuclear submarine in that refinement?

Rear Adm. Sammut : No.

Senator CONROY: You could not fit a nuclear submarine in this process without their being a major change?

Rear Adm. Sammut : That is correct.

Senator CONROY: That is consistent with what Minister Johnston said. If we all looked away and looked back in three or four years time, we would not suddenly find we had ordered a nuclear submarine—based on these requirements?

Rear Adm. Sammut : No.

Senator CONROY: Can you talk me through what Australia designs its subs to do in a broad sense? There may be some things you are not able to discuss—and I appreciate that. What does it mean for the design requirements? I guess it comes down to the force versus performance issue that you outlined. I am looking for just a broad overview of that.

Vice Adm. Barrett : I will take that initially because, as has been presented, it is the service chief who has to fight this and has to develop what the need is. Strategically, the submarine, in more recent years, has been a significant part of the Australian Defence Force strategy and how we operate in this region. Clearly our area of interest is to the north. Clearly our interest in using a submarine is not in using it in and of itself but as part of a laid-out defence strategy. It provides some unique capabilities.

Let me set the context and bear with me while I do, please. About 70 per cent—certainly by value—of the trade that comes to and from Australia passes through this area. In the near future, by about 2030, about 50 per cent of all the conventional submarines that are operating in the world will be in that region. By value, over 90 per cent of our exports and trade will come through that area. We talked earlier this morning—

Senator CONROY: Sorry, I just need to clarify: did you say 50 per cent of all subs deployed will be in this region by 2030?

Vice Adm. Barrett : Of conventional submarines, it is our estimate that about 50 per cent that are operated—

Senator CONROY: I thought that was what you said. I just wanted to confirm that.

Vice Adm. Barrett : The reason we have them, their significance, relates to that context. The submarine is part of a broader strategic view that the Defence Force has. It has a role to play, so clearly the sorts of things we would expect our submarines to do are considered within that context. They need to be able to transit into those areas. They need to be able to sustain themselves for long periods of time. They will need to be in a position to defeat the capabilities that will be prevalent in the area up to 2030 and beyond. Can I say in broad terms, the sorts of requirements that manifest in the current Collins class—in terms of the size and the endurance and the crewing and those sorts of things—the issue for us is that the Collins is a 1980s boat, and the changes that we foresee in the next 20 to 30 to 40 years are a change in technology which affects stealth, sensors and other capabilities—that is a driver. Without going into the finer detail of what we have prescribed, they are the main drivers for why we are looking for a submarine of this type.

Senator CONROY: How does that impact on your design requirements? I think you said it was the balance. I am just looking to get the balance between, as was described, force and functionality. How do you juggle those? What are the sorts of things you need to weigh in your mind when you juggle those?

Vice Adm. Barrett : I might—dare I say handing over to a Lieutenant General to describe some of this—but what I have described I guess is the need and the circumstance. That it does come down to some of those other elements that Lieutenant General Caligari spoke about earlier, about integrating with the rest of the force. They are considerations that are left within the capability development group. I have set the requirement and the need—it now gets translated through that hierarchy of documents we spoke about, to a view as to how it is now represented as part of the ongoing part of the force.

Lt Gen. Caligari : So the needs, and they are service needs,—what the Chief of Navy has is a need for a submarine needs to be married up with what are the needs for each mission. There is not a mission that the Australian Defence Force conduct that is not joint. For example, the utility of a submarine and how it is employed would be significantly impacted by all of the other capabilities of the ADF that would be involved in the region. For example, at some stage in the future the P-8's, Tritons, et cetera. So there is a range of things that will come. Of course, the Chief of Air Force is fundamentally interested in P-8s and Tritons, and they have other missions as well. All of those are, over time, particularly in accordance with our concepts of operation, which is how we operate, which is all impacted of course by what technology is available, all of those things are constantly changing in order to arrive at what is the requirements at the point in time and then married up with the budget.

Senator CONROY: I think you have covered it reasonably, but I just want talk about the range. You described that we have to be to get to those straits and be in the general vicinity of those straits. How far is that from where the subs are currently based?

Vice Adm. Barrett : I am not going to go into the specific detail—

Senator CONROY: No, I was thinking—

Vice Adm. Barrett : I will provide some characteristics that might help. Let me first say, as I have indicated, there are other nations in the area that are building their submarine forces as well—that is open knowledge. The issue for us is to be able to consider that we may need to counter those things. One of the first views that you would have in looking at how submarines operate, is you would seek to do that as close to where they are likely to be operating or maintaining their submarines—so we need to get distance to be able to do that. That would give a view that within our potential area of interest to the north, it is some distance from Australia and it is north, I would argue, of the Indonesian archipelago. The issue then is how you sustain yourself in that area for a period of time—

Senator CONROY: What would be the average mission length at the moment?

Vice Adm. Barrett : I am not going to go into the specifics of the mission length, but can I say we are not seeking to dramatically change the sorts of roles that are performed by the Collins at the moment.

Senator CONROY: Can I ask you what the mission length of the Collins is at the moment? Is that classified of you do not want to discuss it?

Vice Adm. Barrett : I do not want to specifically discuss what we do.

Senator CONROY: It is just speculated in newspapers that I have read from people who have had experience that are 4 to 5 weeks is a mission length, but if you do not want to confirm that I totally understand that.

Vice Adm. Barrett : I would prefer not to. As I said, what I would prefer to say is there is a comparator in talking about Collins. I think that is a way of demonstrating that there is some rigour in how it is being considered, and reasoning behind why we might suggest those sorts of things.

Senator CONROY: I covered off range; help me out with endurance. Is that the length of time on the mission? Is there another concept of endurance?

Vice Adm. Barrett : No, that is it. Endurance largely is your ability to travel—to transit, to do the distance—and then the amount of time you might spend on station. Endurance, though, does have a design effect, clearly, if you intend to do that without support or if you seek to do it with some measure of stealth—that is covertly or submerged, however you wish to describe it. It then has an effect on the living quarters, the ability to store things on board and the number of people you can carry; and not just on propulsion but on the sorts of systems by which you can sustain people underwater for periods of time et cetera. So endurance becomes quite a considerable design factor.

Senator CONROY: For the uninitiated, which is most of us on this side of the table, how does payload affect design? What are the factors that go into thinking about balancing payload and design? What have we got to balance in that?

Vice Adm. Barrett : Payload can mean a number of different things. Clearly, you do not just transit and then remain in the area to do nothing. Payload, depending on the sort of mission, might just relate to the number of people you carry and the things they do. It might relate to the weapons you carry. All of these need to be—not just need to be, but have to be—considered in that design. There are a variety of issues that affect payload. But clearly, in designing the size of your submarine you need to consider what things you expect it to do when it is on station.

Senator CONROY: Is there any other factor, apart from those three, that would be a major factor in your design thinking?

Vice Adm. Barrett : There is another, I would suggest: stealth and your ability, as I said, to be able to get to where you need to act without being detected. Remembering that other nations may choose to have a submarine force, we are doing this in part because we need to be able to counter their submarines. The most effective way of countering someone's submarine is with your own submarine.

Senator CONROY: Stealth is a technology aspect but it is also how far we can move without being detected going in and out of ports and things like that. Is that a fair way to describe it? I am aware of the stealth technology on fighter planes. There is stealth technology for submarines, but the more basic stealth is that we want to be able to move in and out of ports relatively—

Vice Adm. Barrett : I could characterise it this way: the cheapest form of stealth is the fact that I have not told you what submarines can do. That is a cheap form of stealth if you consider it in a philosophical sense. Clearly, you can generate a form of stealth just by the way you operate the submarine. Then there is the physical factor of how you manage the submarine itself, by design, to make it as quiet as possible. So there are several levels that need to be considered.

Senator CONROY: I am sure there are others, but those are the four main things that you have to try and balance.

Vice Adm. Barrett : Those are what I would consider. As an aviator, I will just quickly ask my Rear Admiral submariner who keeps me honest if there is anything I have missed.

Mr King : Just to be clear, submarines are—

Senator CONROY: Are you the submariner? I thought we were going to the submariner.

Mr King : No, but I will pass through it while we go through some more detail. Just to be clear, submarines are one of the most complicated, advanced pieces of technology constructed by man. The US typifies them as immediately following space movement vehicles.

Senator CONROY: That is why was hoping to get some expert testimony from a submariner.

Rear Adm. Sammut : The other point, and Chief of Navy did mention it, is sensor performance. As you have summarised them, they are range, endurance, payload, stealth and sensor performance.

Senator CONROY: That is five, and I am sure there are a couple of others—

Rear Adm. Sammut : There are a whole range of factors that go under those that need to be considered.

Senator CONROY: But they would be the headline ones and you would be fitting the other ones in underneath? I am not trying to be too simplistic—I am happy if you want to say no, these three or four are your second tier issues.

Rear Adm. Sammut : I think that is a fair high-level characterisation.

Mr Gould : All those factors present a very demanding brief to a submarine designer because what you try to balance out here is the size and weight of the submarine, the power requirements of the submarine, the energy requirements inside the submarine, the balance and stability of the submarine, the hydrodynamics of the submarine when it is moving through the water, the hydrostatics when it is stable and does not have much forward movement in the water, the habitability of the submarine over a long and enduring patrol with a crew of 40, 50 or 60 people, how you store the food and how you manage the waste, and overarching all of that is the safety and survivability of the submarine in all the circumstances you would operate it. This makes for an extremely demanding design task for anybody involved in this business. They are all driven by the requirements the Chief of Navy has described.

Senator CONROY: I have discovered a new interpretation of a particular word in my travel through submarine debates in recent times—snorting. Where does snorting fit into this? Is it a stealth issue or an endurance issue or a range issue, or does it become a focal point of all of them together?

Mr Gould : It is all of them. With a diesel-electric submarine you need to use a diesel generator, which breathes air—that is the snorting—to do your battery charge. The battery charge will only last for a certain amount of time, therefore you need to come up and snort to recharge your batteries before you can go back onto electric power, which is the most stealthy mode of moving. So it affects all of those three things.

Senator CONROY: Where do lithium batteries fit into the concept of diesel?

Mr Gould : You would still need your generator to charge the lithium battery. The difference with a lithium battery is that the energy density is much greater, the discharge of electric power is much more stable and the speed of charge, the rate of charge, can be higher. Lithium has the potential to be a considerable source of advantage in endurance, stealth and recharge.

Mr King : When you are snorting you are not as stealthy as you would otherwise be—you are more detectable. The quicker you can charge your storage medium, whatever battery it is, the sooner you can move to a less detectable state. That is what the interaction there is.

Senator MADIGAN: We have had discussion about the Japanese option, the Soryu. I know no decision has been made as yet and that you are looking at all the options, but could you explain to us, without breaching any security issues, with the Australian requirements for armaments, design, the computations, what the subs are designed for, how much redesign and re-engineering would we have to have to accommodate the systems that we wish to put into that design of sub?

Mr King : We have not got to that stage of exploration yet. You will be aware, no doubt, that the minister made a statement about this last week. We are at the early stages of looking at these matters.

Senator MADIGAN: To put the sort of systems armaments that we wish to into any sub, whichever we eventually may choose, do we have to seek permission, say, if we are using American armaments—which I assume we are going to do—from the Americans to put them in whatever vessel that we may choose?

Mr King : The standard American process for the release of any of their sensitive technologies—and of course submarine technologies are right at the top end—is for the US to agree to how we are going to employ them and what we are going to install them in. That would be a normal part of the process.

Senator MADIGAN: And that will not happen till we have decided on a final design?

Mr King : These things progress. At this stage—as I described at another committee—we are exploring the potential to do these things.

Senator MADIGAN: Right. During the Economics References Committee hearing into naval shipbuilding on 30 September, you compared purchasing aircraft with the purchase of submarines from a technological capability et cetera—the complexity of the build. If Australia were to find itself in a situation where we were to become isolated due to a conflict, I would hedge my bets that we have probably got the capability to do some of the aircraft maintenance in Australia. A continuous build, as you said, is how you get the economies of scale, and you can deliver a better project at a good cost to the taxpayer. My concern and I think the concern of a lot of other people, as you would know, is how are we going to maintain the vessels as—as you informed us—the biggest cost is in maintenance? How are we going to do that in Australia—that is my big concern—in the event that we find ourselves in a conflict, if we do not have a viable industry in Australia to do those repairs and maintenance?

Vice Adm. Barrett : If I could make a statement, I did not raise it in the requirements. We spoke earlier in this committee about preparedness and the requirements. My contract with government as the Chief of Navy is to deliver, in this case, submarines at a certain level. It is all about availability. It is all about me being able to provide the required numbers of submarines to go on task when required. That is a key requirement that I have in terms of our strategic operation of submarines. When you look at how we might best do that, it drives, in some regards, a requirement on where maintenance has to be done. And I think it drives for a strong ability for us to do that in-country regardless of which submarine type we might choose in the future. So it is a key consideration in how we go forward.

Mr King : We all agree, I think. There would be nobody in Defence who would not understand your proposal for the need for that security—to be able to do that. The question that has been raised that I took a challenge against was that if you do not build them in Australia then you cannot maintain them. I have never subscribed to that notion, and there is no evidence for it. I will give you some examples.

Senator XENOPHON: Point of order, Chair.

Mr King : The Oberon boats that we operated in this country—

CHAIR: Sorry, before you go on. What was your point of order, Senator Xenophon?

Senator XENOPHON: It was just that I think the proposition put by Mr King is not what was put to him at the evidence by Senator Madigan.

CHAIR: I will defer to Senator Madigan The answer you are being given: is it the information you want, Senator Madigan, or not?

Senator MADIGAN: It is not whether it is more difficult; it is whether it is impossible.

Mr King : Let me give you—

CHAIR: Thanks, Mr King. Would you please continue.

Mr King : To have a fleet that you can maintain, whether it is aircraft or whether it is submarines or whether it is ships, you need a range of things to do that. You need a certain amount of intellectual property in the know-how about the platform. You need a supply chain. You need a workforce in the country that can do the tasks that are required to be done. There is a whole range of things that we have to think about. No matter what we procure or how we procure it, those items need to be attended to. If that cannot be delivered then our advice to government either would be to not procure that item or to not procure it in that manner. That is simply the matter I am pointing out.

What I was trying to point out is that we have examples all across the defence force where the item was not manufactured in Australia and where it is very adequately maintained. In fact, I would claim in some cases that it is better maintained than it is in the country of origin, because of our emphasis on needing to have a well-maintained item, whatever that is.

To be clear, an enormous amount of work has to be done in that area to ensure we have all the systems, information and processes in place to be able to sustain those items in Australia. Given our distance, which is one of the issues that drives submarines, for example—size and whatever—it is very important that we be able to maintain it in this country. Not just 'are you cut off from support in the future', but, quite literally, because of a submarine's speed of transit taking it to some other place for maintenance would just be prohibitive.

Senator MADIGAN: Mr King, one of my concerns is that if for whatever reason there are difficulties with the propulsion system or whatever and we have to change things—and then we get back to having an intimate knowledge of how it is designed, built and maintained—that we have the capability here to do this and not be held to ransom by somebody else. I want to know that we have the safeguards there and we cannot be held to ransom.

Mr King : You are absolutely right to be focused on that. That was the example I was going to use. Under the projects of concern, there is only one capability in defence that is a sustainment capability—and that is Collins, and we built that submarine here. And it is inexpensive and has not been as effective until we had the Coles review and so on. My point there is that building an item of defence equipment in Australia is not in itself a guarantee that sustainment will work. Take the propulsion train. And by the way, as a little aside, from what we can determine not all nations have the same level of problems we have had with the propulsion system. We cannot be sure, but that appears to be the case. The underlying bit of that is other factors that play into it. For example, the manufacturer of those diesels is no longer manufacturing them.

Senator MADIGAN: I realise that.

Mr King : So what is not so important is that we built the submarine here and put the diesels in. What is important is how we are going to maintain the diesels within the submarine for the period. That is what I meant about supply chain intellectual property and so on. So you do have to get that. You are absolutely right to focus on that. But it comes from thinking about issues exactly like that which you have raised: how will you support the diesel through-life, how will you get the spares and so on. Mr Gould might wish to add to that.

Mr Gould : On the question of the diesels, that is a very good example, because the knowledge and understanding of the diesels was not transferred into Australia when the submarines were first built, and we have had to recreate that knowledge by reverse engineering them to correct faults in the diesels and rebuild them here. So that is a good example of the key point that, wherever the submarine is designed and built, the really important thing is to make sure that the understanding and knowledge of the design is transferred and maintained into the country where you are going to operate and maintain the submarines so that you can maintain the design intent through the maintenance process throughout their life. That really requires the planning of the maintenance to begin with the process of the design of the submarine. You should not separate the two. Where you actually build it is of lesser importance than the knowledge for maintaining it.

Senator CONROY: No-one is actually suggesting that we would make the same mistake, are they?

Mr Gould : I am suggesting that we absolutely will not make the same mistake with the Future Submarine, and we will make sure that we design the support and support the design right from the start of the design work.

Senator XENOPHON: In respect of the submarines, in regard to the process, it has been five years in and we are still looking at general issues with respect to capability. Is that right?

Mr Gould : I would say that with the work that has been done on the top-level requirement and the functional performance specification we have a much better understanding of what the design requirement for any new submarine that meets those operational needs will actually look like, so we are—

Senator XENOPHON: So we are still generating the requirements?

Mr Gould : We are not generating the requirements. We are generating an understanding of how, functionally, those requirements would be met in the new submarine.

Senator XENOPHON: I misunderstood the answer given to Senator Conroy—that up to five years in we are still generating requirements for the submarines.

Mr Gould : Not generating requirements. I went through a list of factors a few minutes ago—

Senator XENOPHON: Yes, you did. Four factors.

Mr Gould : A designer's job is to balance those out, because very often those things are in conflict in a design, and you are looking for the best compromise there. So there is a process you have to go through. Having got requirements from the Chief of Navy and from the capability manager, how do those then affect the design and the cost and schedule, and are there compromises that need to be made to ensure that you get the best outcome, balancing all of those factors. That is refinement. It is not generating a new requirement that makes the design task more difficult.

Senator XENOPHON: But the minister said on the weekend that there will be a thorough two-pass cabinet process. He went on to say that 'we will receive advice from our Defence Chiefs and procurement experts to ensure we get the very best conventional capability' for Navy, but that we are still looking at the issues, or refining the issues, of general requirements. Mr King, you have spoken about the urgency of a decision being made. Is that correct?

Mr King : Yes indeed.

Senator XENOPHON: And you are still confident that we can still have the process in respect of the defence capability development process?

Mr King : Yes. I think the words I used were: in submarine design and production terms, it is urgent. In that context, yes.

Senator CONROY: Could you explain the urgency? As you know we have had evidence—I am sure you have reviewed it—suggesting that it is urgent but not in the way you are ascribing urgency.

Mr King : I live with the repeated promises of industry—the conspiracy of optimism—at the beginning of a project that things can be delivered just exactly as we want them, at exactly the price we want them and at exactly the time we want them, only to find in project after project after project those promises are not delivered. And I find myself back here explaining to you folk, as I should, why we have projects of concern and why projects are late. Before the Kinnaird process we used to run about 70 per cent late on projects. We have now pulled that down to about 35 per cent, which is great. I just have to say that what people will tell you, no matter how expert they are, at this stage of the project will always be extremely optimistic, especially—and this is one of the things we learnt on Collins—if you want to do all the design to the proper state of maturity and ensure that the technologies that you are going to put into the submarine are sound, before you build. The last thing you want to do in that process is build. Once you have a computer system, a diesel or a gearbox in a ship or in an aircraft, it is the worst thing to try to work on, because you cannot get people around it and you cannot necessarily even get it in or out without massive work on the hull, in the case of a submarine.

Senator CONROY: I was at ASC just a few days ago and they seemed to have a fairly refined process for taking engines out of submarines. Was I not noticing that or are you just speaking from past experience?

Mr King : But if you do not have to do that you save an enormous amount of time. It is like saying to you that every time you take your car to a garage to do the simplest piece of maintenance you have to completely disassemble it and then reassemble it, and not just pull the motor out but disassemble the body. Obviously you would want a car where you could drive it in and all the technician has to do is change the oil, check the parameters and send you out again.

Senator CONROY: I once owned a car that had inboard discs. You had to take the drive shaft out to get to them. I am aware of the sort of problem. The ASC in Adelaide would say to you that the process they have got going now is very efficient.

Mr King : No.

Senator CONROY: You disagree?

Mr King : It is more efficient, but what would be even better is that you would never have to do it. It is just wrong to have to do it.

Senator CONROY: Hopefully we have learned the lesson of not buying dud engines.

Mr King : Every time you bring something like a submarine together, particularly a submarine that is larger than normal, you need a powertrain that is matched to that submarine. That includes the motor, the diesel, the propulsion—all the different elements. One of the things that I was pointing out, why I meant build last, is that in the design process you will now scale what that propulsion system should be. That might either be—this is a high risk—a completely novel piece of equipment because of our unique requirements or the reuse of something else that has already been used in another application. They then need to be brought together in a system. In my opinion that system needs to be thoroughly tested for a long time before we would commit—

Senator CONROY: All of these are learnt and you have learnt them, and you would say I have learnt them to your cost, but you seem to be absolutely fixated that you should not build. I get a sense from listening to your testimony that you just should not do the build.

Mr King : No, it started from a discussion about the urgency of keeping going on this program. The implication was, 'How can it be urgent, because there is a long way to go?' My point is that it is a very long process to do the design and to prove all the systems that you are going to put in that submarine and then build the submarine. In the case of Collins we committed to building too early in the design process. That is a lesson learned.

Senator CONROY: Is there an upgraded Japanese submarine that is in the water at the moment or that has been built—a new design?

Mr King : No. They have a continuing program of batches of submarines.

Senator CONROY: So, as far as you are concerned, that is an overriding benefit?

Mr King : What is an overriding benefit?

Senator CONROY: That they have got this ongoing process. Even though we are talking about a fairly substantial design change—

Mr King : I am just trying to explain what the Japanese do with their program. I was not biased in that; I was simply explaining that they have a program. Other nations—

Senator CONROY: But your analysis means we can never have program like that.

Mr King : No, I do not think so. I do not think I drew a conclusion. I was trying to talk about the factors that you consider in a program like this. One of the problems is that when we buy, for example, C17s and JSFs and so on, we buy into a world body of supply and maintenance and improvements. One of the problems with Collins was that we bought into six off boats.

Senator CONROY: I am not sure you can grab the F35s as an example of a process that has gone smoothly—

Mr King : No, it has not.

Senator CONROY: to support your case. The F35 is the exact opposite of supporting you case. I am a supporter of it and it is a fantastic aircraft.

Mr King : That in fact highlights the point about new development. All I am saying is that when you buy into a global supply of a system where you have got more than Australia being the only user—and that was a problem with Collins. Some of those manufacturers might have stayed in business if there were 20 or 30 submarines all at that state, because there would be a business base for them. The problem is that we only had six unique motors, unique diesels—not six, three per boat. But you do not have a big body of users. There is no business need, no business justification, to stay in that business. But I am not drawing a conclusion; I am simply pointing out some of the matters. I am trying to highlight that continuing to move forward on replacement of Collins is, in a measured sense, an urgent task.

Senator CONROY: I do not want to jump into my questions because I know Senator Madigan probably still has a few, so I will pass to him.

CHAIR: Senator Xenophon has actually got the call at the moment.

Senator CONROY: I will go to tender processes when my colleagues are finished.

Senator XENOPHON: Mr King, you talked about a 'conspiracy of optimism'.

Mr King : Yes.

Senator XENOPHON: Is it not the role of the DMO to ensure that, if a contract is entered into, there are undertakings given, reduced in writing to the form of a legally enforceable contract, with, presumably, penalty clauses if the contract is not adhered to? If the terms of that contract are not complied with, it is not as though the DMO is powerless. You are in a position to legally enforce your rights, presuming the contracts—

Mr King : But do you know what happens, Senator?

Senator XENOPHON: Please tell me.

Mr King : You cannot make happen what cannot happen. You have a contract in place that the contractor has freely committed to—

Senator XENOPHON: But there are these things called penalty clauses.

Mr King : Yes, and we exercise those. But it does not get the capability into the hands of the military.

Air Chief Marshal Binskin : That is right. You can enforce all the legal liquidated damages that you want on the contractor, but, from a capability point of view, as CDF I do not have the capability in service to be able to then do the task.

Senator XENOPHON: I know there is an issue of capability, but won't that—

Air Chief Marshal Binskin : But that is what it is all about.

Senator XENOPHON: How often are liquidated damages or is legal action taken against contractors who fail to comply with their contracts?

Mr King : During my tenure, quite regularly, Senator—and that does not necessarily solve the problem. And we do do it. For example, I remember a case in the UK. A small yard goes broke and you are left with an asset sitting in a yard that is worthless that has to be finished.

Senator XENOPHON: Presumably, you would contract with an entity that either has assets or insurance.

Mr King : We have some insurances. But, if a project comes out 50 per cent late, I cannot do anything to make it come out.

Senator XENOPHON: Could you take on notice: in the last three years, how many legal actions have been instituted? I do not need to know which parties—

Mr King : It does not have to be a legal action. We can exercise liquidated damages that are pre-agreed. I can name the big ones straight off—

Senator XENOPHON: No, no. I really want to ask you some other questions. But, on notice, if I could get an idea of the quantum of liquidated damages involved. I know the CDF's point, that it does not go to solving—

Senator Johnston: I think you will be impressed with the answer.

Senator XENOPHON: But I am easily impressed, Minister! Can I go to the issue of the procurement process. We are not jumping to a limited tender, are we?

Mr King : Probably, unless you want China and Russia to tender for it.

Senator XENOPHON: Hang on a second.

Mr King : Because you only have an open tender or a limited tender.

Senator XENOPHON: All right. The minister said in the Senate on 27 August:

There are really only three places we can go for the design of a new submarine: the French, the Germans and the Japanese.

Is that fair?

Mr King : What was the context for that, sorry, Senator?

Senator XENOPHON: The minister said they were not ruling anything out—

Senator Johnston: When was this?

Senator XENOPHON: On 27 August.

Senator Johnston: This year?

Senator XENOPHON: Of this year. I will clarify that. Minister, you made the point that for six years nothing was done and you said:

There was nothing in the box. No proper detailed work had been done that would provide a feasible, cost-effective solution to the future submarine problem.

Following on from that answer, my question to you, Mr King, is: is it reasonable to say, 'There are really only three places we can go for the design of a new submarine: the French, the Germans and the Japanese'? They are the three that make subs.

Mr King : I would have thought Sweden was still in that mix, but I do not know the context in which the minister made that statement.

Senator Johnston: And South Korea would probably be in that context too. But, in terms of repeat business for sale, the first two are an obvious port of call. The third one has built more than 41 submarines—that is the Japanese. The Germans have built more than 100 and I think the French are around 70 or 80. So, in terms of design, skill and experience with diesel-electric submarines, they are the three places to go, because Kockums in Sweden has not done very much of late.

Senator XENOPHON: But it is fair to say that in terms of alliance interoperability, that France, Germany and Japan all conduct operations with US submarines?

Senator Johnston: I do not know about that.

Senator XENOPHON: I will not ask you to take it on notice. Are US weapons systems found on French, German and Japanese built or designed submarines?

Senator Johnston: Again, I do not think that is entirely accurate.

Mr King : No, I do not think so.

Senator XENOPHON: A tender that the former government was involved in related to the effect on the economy of building submarines in Australia. I think it was tender RFT0315/2012 won by macroeconomics.com.au and they were paid a bit over $459,000 to deliver a report by 30 June 2014. Are you familiar with that at all?

Mr King : No, I am not.

Senator XENOPHON: I am drawing blanks so you might want to take that on notice. I am looking at a statement of work and an attachment from AusTender.

Mr King : I am not aware of that. I would have to take that on notice.

Senator Johnston: Was it a Defence tender or was it an industry tender?

Senator XENOPHON: It starts off by referring to the Australian government spending in the order of $5 billion each year on military equipment including advanced weapons systems. It made specific reference in paragraph 1.7 of the future submarine project. It referred to four stages including a report on the economic impact of the C1000.

Senator Johnston: Let us take that on notice. If you could give us a detailed description of what that tender nomenclature was, we will come back to you as to the fate of that tender.

Senator XENOPHON: I will forward that to your office. I do not have a copy of the report. I will go to a report in the Adelaide Advertiser on 8 September, which made reference, after speaking to a government source, to the ASC's 'woeful performance' on the air warfare destroyer project—I am quoting not endorsing those statements—saying that it left the government with few other options than to look elsewhere for its next generation submarine. The government source said:

With a record like that, is anyone seriously thinking we should proceed and build a fleet of future submarines in the same shipyard?

My question to the minister is: do you think that is a fair comment?

Senator Johnston: I think I have said something similar given that I inherited a project running several years late and several hundred million dollars over budget running at 150 man-hours per tonne when the benchmark internationally is 60 man-hours per tonne, and the benchmark was originally set at 80 man-hours per tonne. So we have a problem program, we have put it on the projects-of-concern list, and I find it hard to say a great deal of good about the way that it has run. We are in the process right now of trying to remediate that and it is an almost daily task for me to address what is going on with that program.

Senator XENOPHON: But when the undertaking was made prior to the last election to build the future submarines in Adelaide, was that your view at that time?

Senator Johnston: I took the minister—in saying that he was going to persist with option 3, which was son of Collins option 4, which was bespoke design—at his word to say that there had been some legitimate work on that. The work that has been done over the past six years, not five but six years—because this was before NSC in 2008—has left the government with nothing in terms of a contractual commitment. We are looking at what has gone before. We have looked at some of the costings so we are revisiting this program, effectively, anew.

Senator CONROY: It is bordering on misleading for you to continue to quote a figure that the industry and the company involved have demonstrated is no longer the case. You made the comment about 80; they are at 76 man-hours per tonne. That is where they are at right now, so to continue to suggest—

Senator Johnston: Says who?

Senator CONROY: Says ASC in evidence to a Senate committee last week. Are they lying to us? You have got people on the board; are they lying to us?

Senator Johnston: Do you deny that it is two years late?

Senator CONROY: What I am saying to you is it is—

Senator Johnston: Do you deny that it is several hundred million dollars over budget?

Senator CONROY: I should say BAE, not ASC.

Senator JOHNSTON: BAE have performed very well. That is the problem. You keep confusing one performance with three performances. We have ASC, we have Forgacs and we have BAE doing work. BAE have done very well.

Mr King : A more useful number might be that an effective, in-the-groove shipyard would build a ship like the Hobart class for about 3.7 million man hours. Our current estimate for ship completion is 9.3.

Senator Johnston: Gee, that sounds good, doesn't it?

Mr King : But there are learning curve effects coming in. I have spoken about that before.

Senator CONROY: ASC—the minister is correct that it was BAE I was referring to before—have told us that they have improved productivity by 25 to 30 per cent between ship 1 and ship 2. Do you agree with that, Mr King? Is that fair?

Mr King : I do not know that number but I can show you something. I have a chart here if you would like to see it.

Senator CONROY: No, I am asking you if the information given to me by ASC—

Mr King : I will have to check it because I do not know the latest. But what I know is that every year since 2010, up until 2013, the productivity has declined. I have a chart to show you that. That is not produced by me; that is produced by First Marine International.

It is true—and I have said this in evidence to other committees—that we ought to get, and we are getting, the learning effects from what was a start-up yard with no skill sets. But if you say, 'What are your lessons learned?'—

Senator CONROY: From the sound of it, 'Don't start up' is your approach.

Mr King : Not necessarily.

Senator CONROY: 'Not necessarily'—okay!

Mr King : I have two pieces of advice. Senator Xenophon asked, 'What is your responsibility?' The last resort is contract execution or adherence to the contract. It is a last resort and it does not solve much. My first obligation to Defence, to the minister and to the government is to alert them to the cost schedule and risks associated with any procurement path they want to take. It is not my decision, but I have a responsibility to draw on my experience and that of my team to alert them that, even though industry said X, our experience is Y, whether it is drawn from onshore, offshore, a start-up or part of a program. That is the advice that I provide. Governments make their decision based on a combination of national interest and defence interest. Quite clearly, if you spend, if we spend, if I spend—and, quite publicly, we are $360 million over in ship production costs already and it is, in my opinion, going north—that sort of money on ship production that we could have otherwise avoided, that is $500 million the nation does not have in something else.

Senator CONROY: I am intrigued by the passion of your evidence here compared with your previous evidence to Senate committees. You seem to be willing now to use figures in a way that you had cautioned us against previously.

Mr King : I do not think so.

Senator CONROY: Just using dollar figures can easily misrepresent a situation. If I were to say I was 20 per cent over on a cost, that would sound like a lot. If I were to say I was $350 million over on a cost, but that only represented a five per cent overrun, that would not necessarily be as bad. But you now seem to be willing to use numbers constantly rather than reference it to a percentage of the total cost. And we did have this discussion. We said, '$350 million sounds like a lot of money.' You said, 'Yes, and we have to be conscious of every dollar', and we had a discussion about whether that was inside or outside a budget envelope et cetera. Now you are being strident about $350 million and you are talking up that it is going north et cetera. So I am somewhat confused about the strident evidence you are giving today, given previous discussions.

Mr King : I apologise for being strident.

Senator CONROY: I am not being pejorative when I say 'strident'. 'Passionate' possibly qualifies as well.

Mr King : I will try to focus on what I think is the main issue that I am trying to highlight. We can have a lot of offers from companies. They start out very optimistically. When we go to tender it normally goes up. I will just give you an example: AWD. We gave a contract to industry in about the early 2000's. I was not around, but I certainly read the results of it. Industry came back and told us, 'We can build you an AWD by 2012'—I think from memory—'and three of them for $3 billion.' That was used as a basis for forming the Defence capability ambition. By the time we got to tender, it had become $5.2 billion and 2014, and before we finish we will have a price increase significantly over that and it will be 2016. Each stage of that was well intentioned; I am not suggesting otherwise. But as you get into complex projects the reality of what you have embarked on comes home to you, and simply trying to enforce a contract, for example, does not get the capability out the door. What I am saying is that you have to take some of the evidence given about this matter to be in that optimistic category at this stage.

Senator CONROY: You may be aware that I have my own deep scars over promises by Australian industry to deliver projects. So I am not unfamiliar with what you are describing. But the Japanese have never sold a sub overseas in their lives and the Germans, notwithstanding promises, are talking about things like fixed price. Now, you might say, 'Well, of course they would.'

Mr King : I think that is an excellent thing to talk about.

Senator CONROY: I am sure you would welcome something like that written into a contract, and it would bear heavily on your thinking.

Mr King : Yes, it would. But what I have to do then is do a risk assessment over the top of what they have offered, because, at the end of the day, whatever and whoever we commit to, once we start that journey there is no getting off. You have got the lion by the tail.

Senator CONROY: I learnt that myself in my previous occupations.

Mr King : When we go through those phases, I imagine I will be asked by government to give my advice about the risks associated with that matter. For example, and I think we explained this before, in AWD—and I never like to talk numbers on this one, and I do not—we put contingency into the program based on the understanding that we made provision for risk materialising.

Senator CONROY: It is a wise thing to do. I did it myself.

Mr King : The reason I was strong on the shipbuilding aspect was I am a huge believer in getting all the design and engineering done right first and then committing to a program that is a long and repetitive program so you can get your learning curves down. I have been consistent on that the whole time. The reason I highlighted the cost overrun is that the irony is, if you went back about 15 years ago in Australia, we got system integration wrong. We were always getting our systems behind on the system integration. The frustration on AWD is that the system integration, to all intents and purposes, is going fine. In fact, the balance of the program has no cost overrun of any significance. The only significant cost overrun is a significant proportion of the shipbuilding aspect. The shipbuilding aspect of that program is about $2.7 billion, and the overrun is in that. So we are looking at something like 20 to 25 per cent over in the shipbuilding element. We do not know the final number, I have to be very clear about that.

Senator CONROY: But that just demonstrates your skill at giving advice previously, in terms of having the broad envelope and still being within the broad envelope if bits go up and bits go down. It just shows the competence of the DMO.

Mr King : I would like to bask in that glory, but I am not sure I should.

Senator XENOPHON: Mr King, you just said a moment ago that it is important that we go down the right path because once we go down a path it is pretty much irrevocable. Is that correct?

Mr King : That is true.

Senator XENOPHON: So what is wrong with the evidence of Dr John White—who I think has an outstanding reputation and who gave evidence to the Senate Economics References Committee recently—who said that what needs to be done in respect of submarines for the Future Submarine project is to have a comparative, competitive design source selection process?

Mr King : There is nothing wrong with that advice except that in many cases we go down a step through process where we reduce the field, and that depends on a number of factors.

Senator XENOPHON: But is it unwise and is it not risky to reduce the field in the absence of a comparative competitive design source selection?

Mr King : We always do. That is the point that I am trying to make. Sometimes it might look self-evident, but immediately, for example, we say that we are not going to take a submarine from a country that is not a normal supplier to us. We just make that judgement that there are some countries that we are just not going to buy a submarine from.

Senator CONROY: I think this is an incredibly cunning plan by you, Mr King, to get a really competitive process going with the Japanese, the Germans, the Swedes and the French. This is a very cunning plan, if that is what is really going on.

CHAIR: Is that a question or a comment?

Senator CONROY: I think he is a genius.

Senator Johnston: Many people might say that, but he could not possibly comment.

Senator XENOPHON: Can we go back to the evidence given by Dr John White, who has an outstanding reputation in this country in respect of naval shipbuilding. He broke his silence in a sense. He was one of the co-authors of the Winter-White report, which we still have not seen despite a couple of Senate orders. Dr White gave evidence about having a competitive design source selection process. He said that, if we get on with it, we can do so. I think that he gave a time line of about 12 months. Is the time line that Dr White suggested a reasonable one and one that fits in with your concerns about getting on with having a future submarine project up and running and that capability in time for the retirement of the Collins?

Mr King : I did not look in detail at his evidence or the time line, so I cannot comment. I accept that—

Senator XENOPHON: Can you take that on notice after you look at that?

Mr King : Yes, I could do that.

Senator XENOPHON: I am surprised that you did not look at Dr White's evidence.

Mr King : I know Dr John White, and I support your assertion that he is an expert in the community and has had very successful programs. In fact, I go so far as to say that I was part of the recommendation to bring him and Professor Don Winter to have a look at AWD, so we accepted his evidence. What I will say is that there are all sorts of matters that come into play in selecting who is going to ultimately design, build and work with us on our submarine. They go beyond price and they go beyond their assessed ability to deliver; they go on to strategic relationships, interoperability and on and on. So there are a number of factors that come into play in the process that you may go through to acquire this submarine.

Senator XENOPHON: Mr King, and to the minister as well, what do I say to people in my home state of South Australia that feel that Japan will get the subs, that a deal has been done and that all this is just backfilling?

Mr King : The first thing I would say is that is not where we are—at least, it is not the direction that I have. I make some—

Senator XENOPHON: I am reading a statement from the Japanese defence minister on 16 October. He held a meeting with our defence minister. He said:

The meeting was held in an extremely relaxed manner, and Minister Johnston sometimes spoke a few Japanese phrases.

You cannot tell me which ones?

Senator Johnston: My Japanese is not that good for me to repeat them here.

Senator XENOPHON: It was not 'tan'itsu-gen', which is Japanese for 'single source'?

Senator Johnston: [Japanese language not transcribed].

Mr King : Could I make a couple of points that you should tell your folk in South Australia, because I was the project manager that brought the AWD to Adelaide. The AWD is the biggest employer of ship construction in Australia today. Nobody in South Australia is employed on constructing submarines. The biggest task—

Senator XENOPHON: Sorry, but they are employed in the extensive maintenance of those submarines and there is a nexus between building and maintenance in terms of the skills.

Mr King : No.

Senator XENOPHON: There is no crossover?

Mr King : No. I will come back to that.

Senator XENOPHON: Really?

Mr King : Really. There is a huge issue about being able to do that in Australia. I agree it is absolutely a focus.

Senator XENOPHON: So you are saying that we do not have the capability or the potential capability to build submarines in this country?

Mr King : I did not say that. I said—

Senator XENOPHON: Well, it seems to be the path you are going down.

Senator CONROY: I am with Senator Xenophon, I am afraid.

Mr King : Maybe I can give you some ways you might want to talk to your electorate. You have 3,000 very skilled people working very hard to get the AWD project back on track and to get it heading towards world benchmark standards. There is some early work going on, which I think is critical if you are very interested in continuing that workforce, which is a future frigate program to be centred around that construction site. That is the most pressing and urgent piece of work in terms of keeping your skilled workforce going—or mine.

The next point: we have a skilled workforce maintaining Collins and they are doing a much better job than we had done previously until we went on the Coles program. I have no doubt about that. Those people are fully committed and will be for more than a decade. So all of that work is there and is still proceeding. Any work that emerges out of submarines—and as I understand it that is yet a decision to be made—will be new jobs. What the scale and scope of those are, I do not know. That is where the heart of the technology—

Senator XENOPHON: Has any memorandum of understanding, any document, been entered into between the Australian and Japanese governments or navies in respect of sharing technology, sharing information on submarines?

Mr King : There is the science and technology agreement on hydrodynamics and some other work. The minister has made a formal request of the Japanese minister. From my understanding that is the limit of formal agreements.

Senator XENOPHON: So there has been no suggestion of anything further than that at this stage?

Mr King : Not that I am aware of.

Mr Richardson : Senator, going back to Mr King's last answer to your question, the final thing I would add to the points he made in respect of South Australia is that, for reasons that the Chief of Navy previously articulated, and also Rear Admiral Sammut, Mr King and Mr Gould, we will require a sovereign submarine maintenance capability in Australia. Whatever is decided down the track in respect of submarines, they will be maintained in Australia.

Senator XENOPHON: And what do you say to the former submariners who gave evidence before the Senate Economics References Committee, who say that if you build something here then it generally, as a rule, is easier to maintain and cheaper to maintain?

Mr Richardson : I would go back to what Mr King previously said in answer to your question.

Senator XENOPHON: So you say that there is no link between the two? So if you do not build it here it does not make any difference?

Mr Richardson : Not of itself.

Mr King : Not of itself. You can build here and have a very successful sustainment. And there are lessons learnt. It was only last year—nearly 30 years on—that we acquired all the reasonable IP rights that we needed for Collins from the original designer. Even though we built those boats in Australia we did not have all the IP rights to do the maintenance.

Senator CONROY: But we have agreed that you will not make the mistake again.

Mr King : I am just saying—and it is not a necessary precursor. Building here does not guarantee that you have got good sustainment, not at all. I can quote you those examples. Similarly, not building here does not mean that you cannot sustain it—you can. I have never subscribed to that position and I do not think there is evidence to demonstrate it.

Senator XENOPHON: You gave a speech last year, did you not, that Australia could build subs here?

Mr King : Australia can build subs here. The question that I have to provide advice to government on is at what cost, what schedule and what risk. And it is very much a government decision.

Senator XENOPHON: Those qualifications were not contained in that speech last year, were they? I do not think you qualified it in those terms in your speech.

Mr King : I have certainly made those statements regularly in public.

Senator XENOPHON: I am getting the speech delivered to me, so—

Mr King : I may not have in that speech, but I have made those statements over again. People have often asked me. I think they overrate me a lot—not in talent, just inability to influence things.

Senator XENOPHON: It might be talent as well, Mr King!

Mr King : It is that somehow, whatever I say, the government will do. It is simply not the case. I write an independent advice to government on every project.

Senator XENOPHON: You are incredibly modest.

Senator Johnston: He is very modest, but he provides very good advice, can I tell you.

Senator FAWCETT: I think everyone accepts we need the sovereign ability to maintain the submarines. Everyone accepts that there is nothing off-the-shelf that would be suitable, so whatever we purchase, whoever we partner with, there will be a modification phase. Are you familiar with the work of Professor Gorong Roos that indicates that it is the design development phase, which is that element saying this is the baseline we are going to use and we are going to develop it to Australian standards, which is where we grow innovation and productive capacity in our supply chain, and that that is where you can get returns to our economy ranging from two to six times the investment in the development phase. Do you concur with that and will that form a part of your advice to government that this is a net benefit not only to Defence but to the economy as we choose the path by which we look to develop submarines?

Mr King : The economic benefit does not normally form part of my area—that is a Treasury function. Treasury comment on the economic benefits of projects, when they are large. His work is based on a few assumptions that I do not necessarily agree are accurate in this case. As I understand it it is based on work of Professor Elias, I think it is. He has subsequently downgraded his factor—he now says it is not as large. I think we both understand it is on the research, design, development phase, not the production phase. The knock-on effect is important in that work, and the issue is whether or not you are going to produce the trickle down into your community of that technology, into other areas, or you are going to have an export market. There were some very big positives out of Collins: quality assurance systems, certification systems, quality standards, safety standards—a lot of that sort of work. The big problem is in whether or not his work is accurate. I am not an economist so I cannot go that far, but the big problem is that in my view we will want a capability edge. We will need, under any circumstances, to bring in a partner to help us with designing the submarine and therefore the potential of any of that to transfer into an export market I think is negligible. You do not buy it for that—you buy it to have the edge.

The second thing is that I know there were some small companies in Collins, and they are still going, that were 10, 20 or 30 people. They are still going on some of the technologies they did. But the biggest investment in the high-end technologies tend to stay in the submarine community—they tend not to be allowed into the broader economic base. I think that, in a way, if nothing else, significantly reduces what the impact is. On the broader scale, we have been looking at the effects on GDP. Again I say that I am not a specialist in this area at all and the Treasury will be the ones to comment. What you find is that you get the term 'crowding out'. What you would observe most probably is some boost to the South Australian economy but a hurt in other economies of Australia because that money that would have flowed to other things no longer flows into those economies. As I say, I think the specialist in that area is Treasury and they can talk about it. But I have looked at it and I have read about it in some detail.

Senator FAWCETT: Would Bisalloy and the development of new alloys and steels from the Collins program be a good example of a product that has led to new exports?

Mr King : We have only exported it quite restrictively, again.

Senator FAWCETT: That is true, but it has spawned another domestic industry.

Mr King : Yes. I am not saying there is none. All I am saying is that, if the model is based around your having this sort of unfettered trickle-down so that your technologies percolate into your broader community and you expert your product, I think his paper is more valid, but I do not think you have that unfettered flow-down in the submarine space. It is just too sensitive.

Senator FAWCETT: Okay, that is fine.

Senator LUDLAM: As much as I am reluctant to move us on from submarines, I just have a couple of questions for Army—for SAS particularly. I am wondering whether you can either kill off or confirm some rumours that have been floating around in the press for a couple of years around the existence of a fourth SAS squadron, the so-called 4 Squadron, that was meant to have been raised by Prime Minister Howard, I think, in 2005 and tasked more with an intelligence-focused role in late 2010 or early 2011. I note that there is no recognition of the existence of 4 Squadron on the SAS website and it has never actually been formally confirmed by Defence that it even exists. Can you give us a read one way or another?

Lt Gen. Morrison : With respect, I will not be making any comment about that.

Senator LUDLAM: So that is a 'neither confirm nor deny' sort of—

Air Chief Marshal Binskin : We will not talk about special forces and their capabilities, for obvious reasons.

Senator LUDLAM: I have not even started on capabilities and I do not want to trespass into operational stuff, but it does not seem unreasonable to be able to ask whether such a squadron even exists or not. Is that not something that the parliament would have a right to know?

Air Chief Marshal Binskin : We will not talk about special forces capabilities in an open forum.

Senator LUDLAM: I have not started on capabilities.

Air Chief Marshal Binskin : Yes, you have.

Senator LUDLAM: Just the existence of—

Air Chief Marshal Binskin : We do not talk about our special forces and their capabilities, for the obvious reasons.

Senator LUDLAM: The Prime Minister has been talking about them at length in press conferences in the last couple of weeks, around quite hard-edged operational matters, but you are not even able to confirm for us whether this unit—or however you want me to refer to it—exists or not.

Air Chief Marshal Binskin : Chair, I think we have gone down that path. We can go for 15 minutes like this, but—

Senator LUDLAM: No, I will not waste your time, but it is remarkable that the parliament is not even allowed to know whether it exists or not. That is really extraordinary.

I want to come to something that occurred only a matter of a couple of weeks ago, and you may not be able to tell me whether or not these two things are related. Earlier this month, a number of peace activists trespassed on Commonwealth land at Swan Island in Victoria. You will not be able to confirm or deny, I guess, whether it was 4 Squadron that they trespassed on, but just tell us what the protocol is for people who have admitted in advance that they were planning on doing that. I understand that this same group has done so a couple of years running. What is the protocol for apprehending them when they are found to be trespassing?

Lt Gen. Morrison : Swan Island is a Defence facility which is used for Army training, including counter-terrorism training. Under section 72 of the Defence Act, ADF personnel are given the power to detain persons they suspect of trespassing on Defence land until they can be transferred to civilian authorities. It is my understanding that, on 2 October of this year, eight protesters from that group that you mention entered and illegally breached the perimeter of Swan Island's training area and they were apprehended by both Defence personnel and Victoria Police.

Senator LUDLAM: Yes—I gather in that order. The Victoria Police were a little bit late on the scene, so it was actually the Defence personnel, whoever they were, who interdicted them, as it were, initially.

Lt Gen. Morrison : There were four protesters who were apprehended by Defence personnel, and subsequently another four protesters were apprehended by Victoria Police.

Senator LUDLAM: Okay. Reports on the day and reports provided directly to me indicate that they were black-bagged, stripped naked, dragged along the ground and threatened with anal rape and with drowning. I am presuming that is not in operational procedures for apprehending demonstrators.

Lt Gen. Morrison : Those allegations were made at the time.

Senator LUDLAM: Yes.

Lt Gen. Morrison : They are taken seriously by Defence and they are the subject of a Defence investigation.

Senator LUDLAM: Okay.

Lt Gen. Morrison : I would note, however, that, as I understand it, Victoria Police have charged those who entered the Swan Island training facility, under Commonwealth laws.

Senator LUDLAM: That does not surprise me, I guess. I understand that these people expected to be apprehended and arrested. I guess that is what will happen if you sneak onto a Defence base. Describe to me, if you would, the nature of this investigation or review that is underway.

Lt Gen. Morrison : Allegations were made. There are allegations made from time to time against Defence personnel, and Defence takes those matters seriously. We have systems in place to investigate allegations.

Senator LUDLAM: Can you talk us through the systems? What is actually happening?

Lt Gen. Morrison : Here? I have asked for Defence to conduct an investigation to make sure that the actions undertaken by Defence personnel were appropriate.

Senator LUDLAM: Who is undertaking that investigation?

Lt Gen. Morrison : It is being done within the Defence department. I do not have the name of the specific person or persons who are conducting the investigation.

Senator LUDLAM: I do not know that it would be appropriate to ask for the specific persons. Can you point out what kind of designation it is within the department and what process will be followed. Where can I look, in your act or your regulations to find out what processes are to be followed and who is conducting it?

Lt Gen. Morrison : I cannot speak specifically about this investigation. If you are asking more broadly about how the investigation procedures run within the Department of Defence that can be answered, but not by me.

Senator LUDLAM: I guess I want to know under what protocols or processes this particular incident will be investigated.

Lt Gen. Morrison : They will be investigated under the processes that we have within the Department of Defence.

Senator LUDLAM: Just talk me through what those are.

Lt Gen. Morrison : I just said, those processes are not subject matters that I am an expert in.

Senator LUDLAM: Okay. Should I ask the secretary? Who is the expert in the room? We have a room full of experts.

Lt Gen. Morrison : How about I take the question on notice and the department will provide you with an answer.

Senator LUDLAM: Okay.

Lt Gen. Morrison : It will not be specific to this investigation, because I am not making a comment about that. I am not going to give you the facts of this investigation. I will tell you how investigations are conducted within the department.

CHAIR: That is what I understand the question to have proposed.

Senator LUDLAM: That is right. Presumably you are not going to send me off to something irrelevant; it will be consistent with what is being applied in this case. I did not ask you to pre-empt the outcome. You have acknowledged—and I thank you—that you take the allegations seriously. They are actually pretty horrific. What kinds of penalties apply if it turns out that the allegations are upheld?

Air Chief Marshal Binskin : I think you are being speculative. I think we will have to let the investigation run its course and then see what the recommendations of the investigation are.

Senator LUDLAM: Would they ever be made public?

Air Chief Marshal Binskin : Sorry?

Senator LUDLAM: The investigation, the recommendations, findings and penalties—would any of that ever be made public?

Air Chief Marshal Binskin : It would depend on the outcome of the investigation.

Senator LUDLAM: Talk me through what you mean by that.

Air Chief Marshal Binskin : We do investigations, over time, within Defence. You do see statements out there about the outcomes that we have. It will depend on the investigation and the allegations that are made and what comes out of that investigation.

Senator LUDLAM: Can you rule out for me—I suspect this is not what you are saying—that it is not that it will not be disclosed in public if there is found to be truth to these allegations? On what criteria would you base whether or not it is disclosed?

Air Chief Marshal Binskin : It will depend on the outcomes of the investigation.

Senator LUDLAM: What does that mean, exactly?

Air Chief Marshal Binskin : Exactly what I just said. It will depend on the outcomes that are there. If it is totally false, there is really nothing to say. If there are outcomes where there are cases to answer, and there are actions, then it could well be that it is all announced. It just depends on what the outcomes are.

Senator LUDLAM: If it is totally false I presume that you would want to clear the reputations of those who have been accused of—

Air Chief Marshal Binskin : Yes; that is right.

Senator LUDLAM: So, that would be put into the public domain. I am not trying to play funny buggers here. I am trying to work out on what basis—

Air Chief Marshal Binskin : I am not, either. You are taking me through a path, but we are not there yet so I do not know.

Senator LUDLAM: Will, in some form, the results of the investigation be made public?

That is what I am very interested in knowing—that it will not simply disappear and I will be told later that it was operational and I have no right to know.

Air Chief Marshal Binskin : It will not disappear.

Senator LUDLAM: It will not disappear.

Air Chief Marshal Binskin : Then again, it will not disappear because I take the allegations quite seriously as well.

Senator LUDLAM: I believe you. I understand that you do. I have actually never seen anything quite as strong as this from this kind of action before, having participated in similar sort of stuff myself. I will leave it there and I guess we will continue at a later time.

CHAIR: We will resume at 7.30 and we will continue on submarines, with DMO, before we then go to Defence Housing.

Proceedings suspended from 18:25 to 19:29

CHAIR: I will go to Senator McGrath for questions.

Senator McGRATH: What is the cost of the two additional C17A Globemaster aircraft the government has recently decided to purchase?

Mr Richardson : We have asked for the formal documentation from the US. We will not know the precise cost I think until we get that.

Unidentified speaker : It is a letter request.

Mr Richardson : Yes.

Senator McGRATH: They are going to go into the RAAF base at Amberley, are they not?

Air Chief Marshal Binskin : They will go into part of the 6 Squadron at Amberley.

Senator McGRATH: Will any additional jobs be put into Amberley through support crews and things like that for the C17?

Air Chief Marshal Binskin : As in extra crews?

Senator McGRATH: Yes, and support crews.

Air Chief Marshal Binskin : Unfortunately we are talking submarines. Chief of Air Force is not here. As I understand it, as part of the project there will be extra crews, extra personnel, to go with those aircraft, but I do not have those details. Can we take that on notice and give you the exact details?

Senator McGRATH: I might put these questions on notice as my other colleagues are back now.

Air Chief Marshal Binskin : We can give you all those details.

CHAIR: Senator Conroy, when you are ready, we will continue with the Defence Materiel Organisation.

Senator CONROY: I want to return to our discussion around submarines. Mr King, I think Senator Xenophon was reaching the same conclusion as I was. You seem to have a very high risk factor, if I could be polite, on a local build compared to another build, even if it is a new submarine.

Mr King : That is correct. You do not have successful projects without being aware of the risks.

Senator CONROY: Absolutely. You just seemed to discount the learnt both positives and mistakes—that we are incapable from learning from those mistakes.

Mr King : If I could correct that if that is the perception you have drawn. We are capable of learning from mistakes, but some of them are structural mistakes that you can avoid. I did have a chart that I could show you and I can table it. It is a matter of fact that if you do not have a current workforce that is building a current design there are implicit inefficiencies and costs in the start-up. On Air Warfare Destroyer, for example, BAE had only I think in the order of four or five years previously built ships, and I assumed they would have residual knowledge. They did not. They had lost a lot of it. We have not built a submarine in this country for 20 years. So, while we have learned some lessons about not making this mistake and not making that mistake—I have talked about them like a land based test site for a propulsion system—we simply do not have the workforce. If you look at the RAN study, for example, just as an element, they have come to the conclusion that, given that you need an experienced workforce, it would take at least five years to build a core competent workforce to take on such a project. Those are the sorts of things that need to be considered if you are to set in place a program that will execute reliably for government and for the nation.

Senator CONROY: When I was at ASC last week we went through the composition of the build force versus the maintain force. There are clearly different skill sets. It is not that you get rid of all of them but you might be higher in one skill set, but in a maintenance phase you have a lower one but you higher in others. There are a range of skill sets needed. While we do not have the skill sets in place to fully have a build, because we have no build, they seem to have managed that transition and there are a set of skills that could be drawn back into the workforce over time, and if proper preparation were put in place with continuity of work and those sorts of issues.

Mr King : I would agree with that. If you look at that plan I produced with the wonderful title, Future submarine industry skills plan, you will see in there that the assessment from either FMI or Rand was that we had about 670—693, I think—people in Australia with the requisite skills to form the core of a submarine build program. However, the number they assess we would need—and it is a broad assessment—is 1,500 to 2,000, plus a design team. We still have to maintain Collins effectively and we would have to build another workforce—admittedly you might draw on some of those. But it is a big task. All I am saying is that no matter how you embark on a program you should understand those risks, whatever they are, and that when you make decisions about what you are going to do, you should understand the cost and schedule impacts that attach to those risks.

Mr Gould : On this point about the skills at ASC—what they are doing in maintenance and how that factors into build skills: submarine build is fundamentally different from submarine maintenance in engineering terms. It is more different now than it was 20 or 30 years ago. You have seen what they do on submarine maintenance at ASC, but submarine build is all about—as Mr King said—closing the submarine down at the last possible minute. You want to get your engineering absolutely right and you want to do as much of your engineering as you possibly can before you put it in the cylinder that makes up parts of the submarine—and then before you close those cylinders down. That takes a major investment in engineering management techniques and information technology and in getting your design absolutely right. That comes with experience. The US, with the Virginia class, have successfully brought down the time taken to build a Virginia—but they are into their 30th or so submarine now. It can be done, but to assume that you can do it without taking a lot of time and without a lot of up-front investment in technology and individual skills and learning would be very unwise. It would be foolish.

Mr King : I need to correct my evidence. We completed the last Collins in about 2003. I said 20, but it is more like 10 or 11. But a production workforce on Collins will not start for many years yet. My fundamental point was that only a few years out of shipbuilding—in BAE in Melbourne, a couple of years—the skill level had atrophied beyond anything we had imagined, even beyond what BAE had imagined. And it is not the skill level of the individual; it is the team skill level.

Senator FAWCETT: Mr Gould, are you not making the assumption that we would be giving a contract to, for example, ASC or another Australian company to build the submarine? The model that TKMS have very successfully used is one where there is a contract with them to design and build the submarine and they transfer—whether over time or immediately—that build process to the customer location. They actually bring all of their current expertise and know-how, as well as many of their supervisors and workforce, and then gradually build the customer's expertise. So you can still create, with minimal risk, an increasingly customer—in this case Australian—workforce to build in country.

Mr Gould : I agree you can do it that way. I do not think TKMS have used that to build in a foreign country—they probably did with Korea. I know that the DCNS do that with some of their customers. I absolutely agree with you that your program needs to encompass design and build, including the production engineering to translate the design into build, and you need to cooperate very closely with your designer—who also needs to be an experienced builder—to be able to do that. Over time, yes, you could transfer that, but I come back to the point that that still represents a major investment in time and effort to get people trained up to the right level. I do not believe that companies like TKMS have a kind of spare workforce they can suddenly translate and move into a different country. Although I agree it is a good model and that it is a model that could be made to work, it nonetheless would take time and investment to make it work.

Senator FAWCETT: Perhaps I could just ask then to get on the record, in terms of the advice you are providing to government when you look at 'an Australian build', whether you are assuming that it would be an Australian company—whether it is ASC in government hands or ASC in someone else's hands—or are also making allowance for that model whereby the designer and mature builder of the submarine is contracted to build, split between their country and ours, a submarine. Is that part of your thinking in advice to government around risk and costs?

Mr Gould : It is hard for me to predict exactly what advice I would give in those circumstances, but the advice that you could somehow buy or develop a design and then separately contract that design for a build with a different company would not be good advice.

Senator FAWCETT: My point then is that most of the statements to date, whenever we talk about an Australian build, have assumed that either we are going to try to design it here ourselves or we are going to start from scratch with a new workforce, whereas there is a third option, which is partnering, under the TKMS model. And you could do it with Japan; I am not locked into the German solution, but their model is a good model in terms of compressing time frame, reducing risk and allowing that gradual increase of an Australian workforce. So my question is: as you explain the options to government, will you explore that option and lay out a detailed understanding of the costs and risk and time of that model versus ASC repeating what they did with Collins?

Mr King : I think we are responding to the government's request for assessments. One of the things that is central to this is that whatever happens there will be a modified submarine that we will have to acquire. And our view is that this will have to be headquartered in Australia. The balance of how that comes together is very much a decision for government.

Senator XENOPHON: Mr King, I managed to get a copy of the speech. It was in Australian Defence Magazine, in the November 2012 issue. It is headed 'Warren King: submarine mythbuster'. And you should take this as a compliment. It said:

Every so often ADM has the rare urge to publish a speech as a whole, either online or in the print magazine. These times are few and far between.

However such a time is upon us in the wake of a dinner speech from DMO CEO Warren King to the Submarine Institute of Australia dinner last week.

That is a pretty good rap, I reckon. Towards the end of the speech you said:

Ships and submarines, despite the sophistication in the project planning, system integration and weapons systems, remain essentially hand-built. For this reason Australia can be as competitive a producer as any country. We simply need the right management approach and the flow of projects to enable it to happen.

They are great words. Do you stand by those words?

Mr King : I stick by them.

Senator XENOPHON: But why is it that you are saying that we can be competitive but you are saying that we have not been lately?

Mr King : No, we have not been. And I can show you why.

Senator XENOPHON: What you are effectively saying is that because they are essentially hand built, we have done it before so we can do it again.

Mr King : Let me explain what I mean by that. The reason it is difficult, for example, to be very, very competitive in, let's say, motor vehicles, is that the number of units you produce against jigs, fixtures and all that stuff. But when it really comes down to ships—and I think that was in the context of ships—

Senator XENOPHON: No, it was the Submarine Institute of Australia, so the context—

Mr King : Yes, but I think it was in the context of ships. In any case—

Senator XENOPHON: No, I am sorry—

Mr King : But it still holds true.

Senator XENOPHON: It was about submarines.

Mr King : And I hold true to that. So, what you find, for example, in Korea, Europe, America and the UK, for that matter, is that the per-hour labour cost is not much different. So, it is not the labour cost, because it is a highly skilled workforce. That is another thing to remember: you cannot just take anybody from any bit of the manufacturing industry. And the way you become competitive is to have design for production, have the right facilities for production and then repeat the production many times over so that the whole team becomes very—

Senator XENOPHON: So, if you are building 10 or 12 submarines you could do it.

Mr King : You can at the right level; that is true.

Senator XENOPHON: And the right level would be 10 or 12?

Mr King : You can get productive generally probably at around seven or eight. But what needs to be borne in mind in making that decision—for government to make that decision—is the time and cost to get to that point. That is why I placed so much emphasis. When you asked what I would tell the people of South Australia, at the moment we have a workforce in place on the surface combatants that have unfortunately gone through a very difficult learning period but are driving out costs on ship 2, as predicted. They will drive them out on ship 3. My preferred approach to that—I cannot say it is necessarily government's preferred approach—would be to have a continuing program in that domain, and we have been tasked by government to look at it—

Senator XENOPHON: I am conscious of time. In the penultimate paragraph of your speech, you said:

In a global society where strategic stresses may arise that even confound or surprise the experts - where they may be an urgent requirement to grow our submarine or surface fleets and where ‘off the shelf’ vessels are unlikely to be available, an in-country capability and capacity might prove, literally, to be invaluable.

Mr King : I stand by that.

Senator XENOPHON: Perhaps I could just go to the issue of limited tender, and this refers to some very forensic work that the Defence minister did in opposition. Again, I am complimenting the minister. I don't think he wants me to compliment him! The last time Defence went to a limited tender was for AIR 8000 Phase 2—the C-27J Spartan battlefield airlifters, the Caribou replacement. The minister in opposition asked the Auditor-General to look into it, as he should have. The Auditor-General made a specific recommendation in relation to industry. Can you remember what that recommendation and finding was?

Mr King : I remember that they found that I had applied all the appropriate rules. I do not remember what the finding was.

Senator XENOPHON: Perhaps I could just read this to you:

Defence’s approach to industry did not transparently communicate the status of the procurement process, and resulted in a misunderstanding by the commercial suppliers that Defence had initiated an open procurement process, rather than collecting additional information for government decision making in the pursuit of a direct source procurement. In that respect, Defence’s approach did not have sufficient regard to the expectation in government procurement that suppliers will be treated in a fair and transparent manner. Defence has acknowledged the lack of clarity attending its approach to industry and has amended its processes so as to improve communication with industry in the future.

So, is that happening here now—as in the improved processes for the submarines?

Mr King : I am quite certain that—

Senator XENOPHON: Sorry: tell me what the processes are, that the Auditor-General was critical after questioning by the then shadow minister—

Mr King : No, I think the response was—what I felt was being said there, and you might remember that I did have quite protracted discussions with the senator, who is now the minister—

Senator XENOPHON: I have taken inspiration from the shadow minister in my approach to these issues. The minister can take it as a compliment.

Mr King : The point I made then, which I still hold true to, is that if there is no reasonable prospect of a company making an offer that will be satisfactory to Defence, you are genuinely wasting their time. What I think the ANAO report was getting to was that when we solicited the additional information, which was an update, we had had a number of approaches to market by different elements of Defence to get pricing and availability on the alternatives. We had a direction from government about the preferred approach and about the level of data that they wanted on the potential other offers.

Senator XENOPHON: I do not want to go back to that. I am worried about time constraints. The chair has been very patient with me, but he is going to wind me up quickly, and I really want to get to the nub of this. The Auditor-General was quite critical of the process, effectively saying that a number of Defence contractors were being led on, in a sense. I think that is a base summary of it. You say that you have dealt with that. Can you describe those processes to me? Do you need to take it on notice to describe the precise processes to deal with the significant criticisms of the Auditor-General of the Caribou replacement?

Mr King : Yes, we can take it on notice, but the criticism was—

Senator XENOPHON: I only have time for a short answer, I am really sorry.

Mr King : The criticism was that we were not clear enough with the offerers when they were offering us a price.

Senator XENOPHON: No, it actually goes beyond that. I think you have a very narrow construction of what the Auditor-General said in that report. I have read it fairly to you—

Mr King : So have I because I was worried that I had done something incorrect, which proved not to be right.

Senator XENOPHON: No, I am just saying the Auditor-General said there should have been a better process. You said that you have improved those processes. Can you provide to me details—

Mr King : What I think was critical to it was the clarity. Any government, under our procurement guidelines can choose a limitation of tendering where that limitation meets its defence needs.

Senator XENOPHON: But you need to be up-front with those contractors.

Mr King : But we should be up-front.

Senator XENOPHON: Okay. Right now, in respect of submarines you have been in discussions with Japan, Germany and France.

Mr King : Sure.

Senator XENOPHON: Any other countries?

Mr King : Sweden, and the UK and the USA.

Senator XENOPHON: The USA only has nuclear subs, though.

Mr King : Yes, so does UK, but we have had a broad—

Senator XENOPHON: Sure.

Mr King : But we do not have an approach to market yet. Normally our—

Senator XENOPHON: Sorry, you are not telling me that, as a result of those discussions, going around and seeing all these people, they are not busy doing work and spending money to gear up to a bid?

Mr King : They will no doubt be doing that, but that is not a formal or misleading approach to market; that is simply gathering—and we have had some paid work done as well. We have paid Sweden to do work on looking at the evolved design, for example—and France and Germany. We have paid them money to do work for us. We paid them on the MOTS options. So, yes, we have been engaged with them and, yes, we have paid some of their costs. They may well say that they have had some costs, but this is a big world market. We are talking about billions of dollars of acquisitions. That is their core business and naturally they will have marketing money to do it. That does not represent a formal approach to market.

Senator XENOPHON: But the mistakes in relation to the Caribou replacement will not be made again?

Mr King : I would hope not.

Senator LAMBIE: Since we are hardly building ships anymore and it does not look like we are going to build our submarines here anymore, what is the cost—

Senator CONROY: Don't give up!

Senator LAMBIE: What is going to be the cost to the future of Australia when we do not have these skills here anymore? Has anyone put a price on the lack of skills that we will have in these areas in the future?

Mr King : Sorry, what was that second question?

Senator LAMBIE: We are hardly building ships here anymore; we are not going to build submarines here at this point in time. What is it going to do to the future of this nation when we do not have these skill sets around anymore?

Mr King : You mean on materiel or the skills?

Senator LAMBIE: On both—the materiel and the skills.

Mr King : If I can give you an example—

Senator LAMBIE: Wouldn't it be a fabulous thing to have this as a huge building of bringing people together and doing this as a nation and striving forward, instead of passing the buck and passing it over to someone else because it seems all too bloody hard? I think that is the question.

Senator CONROY: Hear, hear!

CHAIR: We will give the minister the opportunity to answer the question.

Mr Richardson : I might add something. There are two big projects coming up in naval shipbuilding. One is the future frigates and the second is the future submarines. The government has not yet taken a decision in respect of either, so the assumption in your question, that we will not be building anything in Australia, I do not think is correct.

Mr King : Can I just give you a sense of scale, too, because all these things are important. Looking at military demand as a way of keeping industries alive is a very false guide—and I will give you an example because I started the AWD project. It was less than one day's production of steel and we bought that once in a 10-year construction program. So you cannot keep the steel industry alive on building a warship. You just cannot.

The other aspect—and I am not an economist—is that the economic modelling says that, while you can get a point response for some of our big projects in a particular state or a particular environment, that money can in fact create a negative outcome in adjoining states. One model I have seen, for example—and as I said, I am not an economist—says that, if you do this sort of work in say, Adelaide, you get a point positive in Adelaide, which is not all that large, surprisingly, but you get a negative in the other states because of the crowding effect. For example, if you spend a billion dollars more on this to get this capability than you need to then that billion dollars comes out of stuff that might have been a road or a railway line or a port. And a defence asset is not productive—it is critical for defence, but it is not a productive asset.

Senator LAMBIE: Do we not 'downstream'—where one state is doing part of the fitting out, one state is doing another, so it is all being shared around?

Mr King : You get a little bit, but the total crowding out modelling shows that—

Senator CONROY: If you are at full capacity. Crowding out works if you are at full capacity. If you are under-utilising assets around the country—

Mr King : Indeed.

Senator CONROY: But if your economic analysis—

Senator LAMBIE: As a matter of fact, if you were doing the job and you were doing it well, and you were doing it better than everybody else, they would be ordering them from us instead of us doing it the other way. This is where we have lost our way. Why aren't we leading? Why aren't we out there as the country that is leading with this stuff? That is what we need to be asking ourselves.

Mr King : I went to quite some length while you were not here about, for example, why I believe concentrating on building surface ships at this time would be the greatest way forward. I explained how we could be a world benchmark.

Senator CONROY: Wave goodbye to the subs.

Senator XENOPHON: Chair, Mr King has made some quite bold economic assertions. Could he please provide us with the basis for that.

CHAIR: I think perhaps the fairest thing to do would be to take it all on notice if we can.

Senator XENOPHON: On notice.

CHAIR: Otherwise we are going to be here for hours.

Senator XENOPHON: I would like to know which texts I need to read, on the basis of what you have said.

Mr King : We have read the same text that came out of South Australia, plus we used a Victorian model. But I do make the point—

Senator XENOPHON: But you have rebutted it with, presumably, an alternative economic hypothesis.

CHAIR: Let Mr King finish, and that will then complete the Defence Materiel Organisation.

Mr King : I will just make the point that I made before. I did this internally to understand the various arguments being offered for my own interest. The real authority on economic modelling is Treasury, but we can certainly take the question on notice.

Senator LAMBIE: Can I just take a—

CHAIR: No, anything else will go on notice now for tonight. I want to conclude the Defence Materiel Organisation, and I thank those officers.